Views expressed do not necessarily reflect official positions of the Federal Reserve System.
he financial crisis of 2008 was a liquidity crisis—that is, aperiod when some creditworthy households and firms couldnot obtain sufficient liquid (money) balances to completenecessary transactions. Most visible was the closure of the repur-chase agreement (repo) market, in which both banks and non-bankingfirms alike typically exchange securities for short-term cash.The Federal Reserve responded to the crisis by initiating anextraordinary set of assistance programs under the authority of Section 13(3) of the Federal Reserve Act.
An unusual aspect of these programs was that they sought to assist individual firms orindustries. In normal times, the Federal Open Market Committee(FOMC) sets a target for the federal funds rate and enforces it bychanging the size of the Fed’s balance sheet to change the aggre-gate amount of liquidity that it provides to financial markets. Theallocation of liquidity among households and firms, in turn, is deter-mined by financial markets. Beyond the liquidity crises of individualfirms, an interesting question is whether the
amount of liquidity in the economy was appropriate before and during the crisis:Was there a liquidity crisis in the “large” as well as the “small”?The recently updated Monetary Service Indexes (MSI) publishedby the Federal Reserve Bank of St. Louis provide some evidence.
These indexes build on the idea that monetary assets (includingcheckable deposits, saving deposits, small-denomination timedeposits, and money market mutual funds [MMMF]) furnish “mone-tary services” that households and firms use to buy and sell goodsand services. Some assets are immediately media of exchange (e.g.,currency), while others are not (e.g., saving deposits and small-denomination time deposits). The MSI are chained-weighted indexnumbers (similar to those used to measure gross domestic product)that combine observed market data on financial asset quantities andown rates of return in order to measure these flowsof monetary services. The own rates of returnreceived by households and firms on their mone-tary assets, compared with broader market ratesof return, provide measures of the opportunitycost of the monetary services furnished by eachasset. Economic and statistical theory providesspecific mathematical functions with which tocalculate the MSI as described in Anderson andJones (2011).The chart shows five MSI. (These MSI differwith respect to the number of included assets.
The data are log levels, each normalized to 1.0 inAugust 2001.) MSI-M1 contains only currencyand checkable deposits, and MSI-M2M includesthe assets in MSI-M1 plus savings deposits andretail MMMF; both leveled out in 2004 as theFOMC tightened its policy stance and laterincreased sharply during the autumn of 2008. MSI-MZM includes theassets in MSI-M2M plus institution-type MMMF; it accelerated begin-ning mid-2007. MSI-M2 includes the assets in MSI-M2M plus small-denomination time deposits, and MSI-ALL includes all the assets of MSI-M2 plus institution-type MMMF. These broader series grew moresteadily both before and during the crisis. Although the evidence ismixed, the MSI overall suggest that monetary policy was accommoda-tive before the financial crisis when judged in terms of liquidity.—Richard G. Anderson and Barry Jones
These programs are reviewed by Anderson and Gascon (2009, 2011).
See Anderson and Jones (2011). The Bank of England publishes similar measuresfor the United Kingdom (Hancock, 2005). The use of index numbers to measure themacroeconomic concept of money began with William Barnett; see Barnett andSerletis (2000) and references therein.
See Anderson and Jones (2011) for details.Anderson, Richard G. and Gascon, Charles S. “The Commercial Paper Market, theFed, and the 2007-2009 Financial Crisis.” Federal Reserve Bank of St. Louis
(6), pp. 589-612; http://research.stlouisfed.org/pub-lications/review/09/11/Anderson.pdf.Anderson, Richard G. and Gascon, Charles S. “A Closer Look: Assistance Programsin the Wake of the Crisis.” Federal Reserve Bank of St. Louis
,January 2011, pp. 4-10; www.stlouisfed.org/publications/re/articles/?id=2067.Anderson, Richard G. and Jones, Barry. “A Comprehensive Revision of the U.S.Monetary Services (Divisia) Indexes.” Federal Reserve Bank of St. Louis
(5), pp. 325-60;http://research.stlouisfed.org/publications/review/11/09/325-360Anderson.pdf.Barnett, William A. and Serletis, Apostolos, eds.
The Theory of Monetary Aggregation
.Amsterdam: North-Holland, 2000.Hancock, Matthew. “Divisia Money.” Bank of England
, Spring 2005,pp. 39-46; www.bankofengland.co.uk/publications/quarterlybulletin/qb050103.pdf.
Liquidity Crises in the Small and Large